Two Cayman residents are challenging a decision by the Tax Information Authority to comply with a tax information exchange request by the U.S. Internal Revenue Service.
Lee and Sheila Aronfeld are naturalized citizens of the Cayman Islands but remain taxpayers in the United States, where they are subject to a criminal tax investigation, according to the court application.
Their application to file for judicial review claims that the Tax Information Authority was required to notify anyone whose rights would be affected by its decision to comply with the IRS request for information and that the failure to do so had infringed the applicants’ rights to privacy and a fair trial.
On July 22, the Tax information Authority served Cayman companies Tropical Trader Co II Ltd., Sir Turtle Building Co Ltd. and We Five Ltd. with a production notice. The notice did not provide any information about the nature and origin of the underlying tax information exchange request, but it identified the Aronfelds, who are shareholders of the companies, the court application states.
The request sought the production of “all company records including but not limited to all transactions pertaining to [the Aronfelds],” including financial records, account information and other contracts.
Lawyers for the Aronfelds argue that the requirements were impossibly wide and amounted to “fishing,” given that the information sought “could not reasonably be supposed to be foreseeably relevant.”
The lawsuit claims that the Aronfelds should have been notified and given an opportunity to be heard under the TIA Law “as a matter of fairness.”
The production notice represented an oppressive, unreasonable and disproportionate invasion of the applicants’ rights under Articles 7 and 9 of the Bill of Rights, the court application said, because neither the applicants nor the companies that were served with the notice had been given the opportunity to make representations to the Tax Information Authority or to challenge the request in court. Article 7 of the Bill of Rights guarantees an individual’s right to a fair trial and Article 9 governs privacy rights.
Had the applicants been able to make representations, the Tax Information Authority would either not have complied with the SEC’s information request or it would have applied to a court “with the reasonable chance” that the court would have rejected the information request, the court filing claims.
Under the Tax Information Authority Law, the authority must apply to a court for a production order when an information request is made in connection with a criminal investigation. Only when a TIEA request is received outside of criminal proceedings, can the authority itself serve a notice without application to the court.
If the Tax Information Authority had acted in the belief that the request was not part of a criminal investigation, the authority would have failed to inform itself “adequately or at all” about the nature of the request, the court application argues, and in any event the authority should have notified the Aronfelds of the request.
The court application claims that recent amendments to the law in 2014 have created a new category of case where a criminal investigation is under way but proceedings have not commenced. In these circumstances, the tax authority is not required to apply to the court or to notify the individuals who are subject to the request.
“In eliminating any requirement for notice or judicial oversight in cases of criminal investigations the Section 8(4) Amendments and Section 17 Amendments were unconstitutional as contravening the rights of the Applicants and/or the [the companies that were served with the production notice] under Articles 7 and 9 of the Bill of Rights,” the application states.
The lawyers for the applicants said the production notices were unlawful, and they have asked Cayman’s tax authority for a copy of the tax information exchange request.
The application for leave to file for judicial review is the latest legal test of Cayman’s tax information exchange framework.
In a judgment released in July following a hearing in April, the Court of Appeal upheld an earlier Cayman Islands Grand Court ruling that the Tax Information Authority had not followed all of its legal obligations before releasing the information to its Australian counterparts, following an application under the relevant Tax Information Exchange Agreement.
In the initial 2013 judgment, Justice Charles Quin ruled that the Cayman Tax Authority had, among other things, failed to notify the parties subject to the information request and thereby infringed their rights to privacy and a fair and public hearing under the Cayman Islands Bill of Rights.